“Recessions are common; depressions are rare,” writes Nobel Prize-wining economist Paul Krugman in a recent New York Times column.

Though historians judge otherwise, Krugman believes, “as far as I can tell,” that there have only been two depressions in American history, “the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-1931.”  Current conditions, he notes, might just bring on the “third depression.”

Krugman may be an economist of note, but a historian he is not.  He certainly cannot tell very much.

Major economic depressions, called “panics” in the 19th and early 20th centuries, occurred in approximate 20-year intervals throughout American history – 1819, 1837, 1857, 1873, 1893, 1907, and 1929.  There have also been numerous recessions on a much smaller scale, especially in the 20th century.

Why do we have periodic panics and economic disruptions?  They are simply economic storms, not unlike meteorological ones.

In a borrowed line from the Hollywood film, The Day After Tomorrow, Dennis Quaid’s character, Professor Jack Hall, explains the workings of a physical storm:  “The basic rule of storms is that they continue until the imbalance that created them is corrected.”  A great line that can accurately explain economic tempests. 

Most of the depressions in our history have been caused by imbalances in the currency.

Too much cheap money and lax credit have been the chief faults in causing many economic storms, as is the case with our current mess.  Too much money and too much credit cause reckless speculation, which leads to over-expansion and over-valuation.  The economy can only take so much.  Eventually the bubble will burst, as it did in the fall of 2008 with land and home values, causing millions to go under.

Two 19th century panics, in 1837 and 1893, can also be attributed to imbalances in the currency.

A massive panic struck in 1837, the first year of Martin Van Buren’s presidency.  Andrew Jackson had waged war on the Bank of the United States, killing the renewal of its re-charter in 1832.  To further weaken the bank, the president withdrew the government’s deposits, placing them in smaller state banks, called “pet banks.”  These banks, flush with substantial amounts of cash, began loaning it to businesses and individuals as fast as possible.  All the new money, along with cheap credit, led to wild speculation, mainly in land, causing the values to soar.  When the bubble popped in 1837, it sent the economy crashing.

Van Buren faced mounting pressure by his Whig opponents to raise tariffs and taxes, as well as federal spending, particularly for internal improvements projects like roads and harbors.  The president resisted and, instead, cut expenditures by 21 percent.  The economy recovered, though not quite in time for Van Buren to be re-elected.

In 1893, the nation suffered the worst panic up to that time.  The government, in 1890, had passed a law to purchase all of the domestic silver supply each year, up to 4.5 million ounces.  To make the buy, the Treasury issued new Greenback notes, redeemable in gold.  The new paper notes, along with all the new cheaper silver, flooded the country.  The money caused a massive boom period that saw unemployment drop to just 3 percent.  Every sector of the economy seemed to be doing well, even farmers. 

With the over-expansion, namely in railroad building, the bubble popped in 1893, and by 1894 the unemployment rate reached 18.5 percent and the economy had contracted by nearly 10 percent.

But within two years of the economy bottoming out, President Grover Cleveland, called “the Ron Paul of his day” by economist Tom DiLorenzo, employed conservative policies and oversaw an economic expansion.  By 1897, the year he left office, the economy had grown by 20 percent and the unemployment rate had been slashed to 14.5.

In both cases, 1837 and 1893, the federal government stayed out of the storm and allowed the economy to correct itself, making the crisis short-lived.  This is the reason Krugman does not include 1837 and 1893 in his analysis of depressions.  They were so short that they could not possibly qualify, at least in his way of thinking. 

But the reason earlier depressions did not last long is because the president overseeing them did not use a Paul Krugman remedy – massive government spending.  Krugman, a Keynesian economist, is so convinced that using government spending as an effective economic stimulus that he criticized Obama’s spending plan as too small.  Krugman wanted a stimulus bill twice as large as the $787 billion plan passed in the early part of 2009 and is, even today, pushing for more government spending.

Earlier Americans believed in using laissez faire methods rather than spending.  President Martin Van Buren used retrenchment – the cutting of taxes and spending.  President Grover Cleveland, in 1893, stopped the inflation, reduced tariffs, and sliced expenditures.

By contrast, FDR used the Krugman solution, and as a result, the depression worsened and lasted until the 1940s.  In fact, the Great Depression did not abate until after the war.  It was not until Congress cut personal and corporate taxes in 1945, and discontinued price controls in 1946 that the economy revived.  True economic growth began producing surpluses, which had not happened since 1930, and brought unemployment down to less than 4 percent.

The nation faces two choices – the Roosevelt-Krugman-Obama remedy, or the policy of Van Buren-Cleveland-Ron Paul.  Let history be the judge.

It seems every time Democrats are out of power and seeking to regain the White House, the United States just so happens to be in the “worst economy since the Great Depression.”  Barack Obama has been no different.  Yet its funny how Democrats conveniently forget about the Carter years, when we experienced double digit inflation, unemployment rates, and interest rates, forcing us to drag out the old misery index.  We haven’t quite reached that point as of yet.

But there’s little doubt we are in a tough spot and certain sectors, like the banking and housing industries, could very well end up in the worst shape since the 1930s.  And without the right dose of medicine we could slide into a new depression.

Senator Obama’s prescription, however, is a recipe for disaster.  Major tax hikes and massive doses of big government spending have only served to drag out, and even worsen, economic distress.  And we need only look at the Great Depression and FDR’s New Deal to see why Obama’s plan will take us down the same road.

First, it must be noted that, despite the best efforts of academia, the New Deal did not get America out of the depression; quite the opposite.  It actually made it worse, or as Amity Shlaes writes in The Forgotten Man, the federal government “made the depression great.”

FDR ran for president in 1932 against the hapless incumbent, Herbert Hoover.  Roosevelt stuck to more traditional Democratic campaign themes, relentlessly attacking the Hoover administration for overspending and not balancing the budget.  FDR promised a return to these basic policies, the bedrock of Democratic economic thought for more than a century.

But once in office, all that went out the window, an all-to-familiar Democratic scene.  FDR set out to implement his New Deal for the American people, and the government was quickly transformed.  A host of new programs were enacted and new bureaucracies created to administer them.  Washington assumed a wealth of new powers, all to fight a global depression that put one in four workers in the United States out of a job.

Did it succeed?  Hardly.  An unemployment rate of 25 percent during the depression’s height never dipped below 14 percent during the 1930s and continued to hover around 10 even after the military buildup began in 1941.

How did the mighty federal government fail so miserably? 

Both Hoover and FDR committed a major economic no-no by raising taxes in the midst of an economic downturn.  Under Harding and Coolidge the top rate had been sliced to 25 percent from Wilson’s wartime rate of 70, when the nation was in the midst of a serious recession after the end of World War One.  Hoover raised it to 63 percent in 1930, then FDR upped it to its record level of more than 90 percent.  Corporate taxes, excise taxes, and estate taxes all went through the roof.

New taxes were also placed on both workers and employers with the implementation of Social Security in 1935.  This caused a crippling blow by placing additional burdens on workers, who needed all the money they could earn, and employers who now had to budget more for each worker, limiting the capital that could have been used in production or to hire additional hands.

According to Jim Powell, in FDR’s Folly:  How Roosevelt and His New Deal Prolonged the Great Depression, the federal government also enacted a new anti-trust law, the Robinson-Patman Act in 1936 and launched 150 anti-trust lawsuits, further hampering business.  The National Industrial Recovery Act kept prices high and actually jailed people for trying to cut them.  And, like a good, modern Democrat, FDR more than doubled federal spending and issued more an unprecedented 3,728 executive orders, all in the name of fighting a national emergency.

With all this government intervention, is it any wonder the economy struggled to regain its footing?  Now Senator Obama just might be following in FDR’s footsteps, as his “change” message seeks government solutions for all of our economic ills.  But in this instance, “change” means “socialism.”

Barack can’t say this, however.  So, much like FDR’s campaign rhetoric, Obama, moving to the center since gaining the nomination, now offers a few popular, and even sound, fiscal policies.  One such  proposal is a middle class tax cut to those making under $250,000, the new Democratic definition of rich.  This “tax cut” will apply to 95 percent of Americans, but since more than 30 percent pay no federal income tax, the only way that could work is by giving out checks every spring to those who did not earn the money.  Like earned income tax credits, its simply another welfare program in which the Democrats are using to buy votes.

Another recent Obama proposal is a “net spending cut,” which he does not bother to detail with any specifics, probably because there are none.  There can be no net spending cut while proposing a national health care plan, a “green” jobs program, increased education spending, and other expensive goodies. 

This tactic of campaign in the center but govern on the left has become standard Democratic jargon, right out of the Clinton playbook, in order to gain voters in a skeptical Middle America.  But like Clinton, Obama will not deliver on any of these center-right proposals.  Bill Clinton during his 1992 run promised to “make the rich pay their fair share” and not to raise middle class taxes.  But once in office, Clinton gave us the largest tax hike in American history.  Obama and the Democratic Congress will likely follow suit.

Most of the Obama plan is not change, just more of the same.  He favors a near-doubling of the capital gains tax to 28 percent.  At a time when we need more capital pumped into the economic system, a President Obama will take more of it out to feed the federal appetite.  This will only serve to restrict investment and reduce federal tax revenue.  But, as he stated in a debate with Hillary Clinton during the primaries, it’s a matter of “fairness.”  In addition, he has also proposed lifting the cap on Social Security taxes, taking another serious bite out of the investor class.

Obama has also relentlessly attacked corporations as “unpatriotic” for moving production overseas, yet has proposed no solutions to the sky high tax rate of 35 percent, the second highest in the world, and the crippling regulations that border on the ridiculous and cost corporations billions per year.  And since Democrats are big fans of anti-trust, we might expect the Obama Justice Department to go after these evil, “unpatriotic” job-creators, the way Bill Clinton did.  Like Hoover and FDR, Obama has proposed new tariffs at a time when the free-flow of goods is essential for economic growth.  Sky-high tariffs are tantamount to higher income taxes during a recession.  Not a good idea.

Obama has recently stated that he opposes a federal spending freeze, which John McCain supports, and he has plans to spend nearly a trillion dollars in one of the largest expansions on record.  But like FDR’s attacks on Hoover, Obama has lambasted the Bush administration for running a $500 billion deficit. 

Yet the actual deficit is over $600 billion, when you add the surplus Social Security revenue that is spent every year as general funds.  The government never counts this as debt, so as to make the number much lower than it actually is, but rest assured it is added to the National Debt.  Analysts are even predicting the deficit to be in the neighborhood of $1 trillion by 2009, without any new spending.  That, coupled with Obama’s spending spree, and our fiscal problems quickly become nightmarish. 

Are we to believe that Obama can institute this massive spending plan and balance the budget by taxing only those making over $250,000 a year?  It can’t be done.  He is either lying about his tax plans, which is a good bet given his track record, or he cares nothing about the deficit or the debt, also a possibility.  And its probably both.

But despite the fact that all this has been placed in the public eye, Obama still leads in the polls, albeit by the slimmest of margins.  It is difficult to believe why 48 to 50 percent of Americans are backing a candidate who is using fancy slogans and slick speeches to promote socialism.  They are voluntarily enslaving themselves to government.  This is not America, the “empire of liberty” our Founders envisioned.  Let us hope enough Americans still believe in the ideals of the Revolution to halt the most dangerous candidate and the most perilous campaign in our history.

Since the economic meltdown began, we have been treated to an overwhelming dose of Big Government in recent weeks.  President Bush has already signed two bailout bills totaling over $1 trillion and the Fed has been busy pumping hundreds of billions more into banks and mortgage companies in the hopes of staving off disaster.

But where will all this money come from and when does the madness stop?

And none of this has been lost on the presidential candidates, as they have gotten in on the act.  Barack Obama promises massive increases in government spending and has no plans to scale back his proposed spree one bit.  He is still planning big tax hikes and big programs despite the problems.

McCain, rather than being the Anti-Obama, has joined the chorus, also proposing government solutions to the crisis.  His $300 billion plan for failing mortgages sounds like something right out of the socialist playbook.  And with his support of the latest bailout, at a pork-filled $850 billion, McCain has now lost all credibility on his opposition to overspending and earmarks.

With these two, it seems that limited government and the republican ideals of the Founders are dead, maybe forever.  This financial crisis puts us on a dangerous slippery slope, to the dark valley of socialism.

During the 19th and early 20th centuries, the American economy also endured financial panics, as they were called then, in approximate 20-year intervals – 1819, 1837, 1857, 1873, 1893, and 1907.  The Fed was created in 1913 to end this “boom-bust” cycle, which we know hasn’t happened.  But even though many of these early depressions were severe, they did not last long, precisely because American statesmen let the market regulate itself and did not interfere with an infusion of government bailouts. 

But since Woodrow Wilson and the Progressive Era, the ideas of laissez faire capitalism have been shelved, with the exception of the Harding-Coolidge years when a harsh post-World War One recession was overcome in months with a hands-off approach.

During the severe economic crises of the 1920s and 30s, various governments responded in a variety of ways, all using government power to some degree.  Let’s briefly examine two – Germany and the United States. 

After World War One, Germany was in a state of financial chaos.  The Allies imposed a massive reparations plan that would require the Germans to pay for the total cost of the war, with installments lasting until 1989!  The German economy was buckling under the pressure.  So in the hopes of alleviating the strain, and to make their payments, the German government, under a new, and foreign, republican system, cranked up the printing presses.  As a result, hyperinflation set in.

Whereas the German Mark was pegged at 4 to 1 against the dollar in 1921, by 1923 it was several trillion to 1.  People were literally using a wheelbarrow full of money to buy a purse full of goods.  Lifetime savings were wiped out.  There are stories of German families actually burning paper currency in wood stoves because it was cheaper than using the worthless money to buy firewood.  These conditions allowed tiny fringe parties, like the little-known Nazis, to gain widespread support.

When the global depression hit in the late 1920s, the United States responded, initially, with the opposite approach, by tightening up its money supply in what the late great Nobel laureate Milton Friedman calls “the great contraction.”  By FDR’s first year in office, the Fed had pulled a third of the money out of circulation, and that coupled with the massive New Deal programs, which further hampered the economy with higher taxes and oppressive regulations, its little wonder the economy struggled throughout the decade to regain its strength.  A crisis that started in 1929 continued to see unemployment at nearly 10 percent on the eve of Pearl Harbor, despite a major military buildup.

Government stepped in to tackle the problems in both countries, and in each instance government failed.

Our current mess is not so much a financial crisis but a crisis of stupidity.  It is not, as the leftwing press headlines, a failure of capitalism.  Borrowers stupidly took out mortgages that they could not afford and banks and other lending institutions stupidly loaned the money, in many cases pushing prospective homebuyers into even bigger houses.  Now the government is stupidly intervening in the hopes of cleaning up the mess, a mess it has a part in. Washington is asking hardworking taxpayers to step in and pay for the stupid on Wall Street and the irresponsible on Main Street. 

This is the wrong approach.  The federal government must stay out of the crisis and allow the market to correct itself.  These troubled banks and mortgage lenders must be allowed to fail.  Taxes on capital gains and retirement plans, as well as other government restrictions on success, must be ended.  Only then can the economy regain its footing on a sound basis, not one propped up on a house of cards. 

As Newt Gingrich has recently written, we are like someone who continually mops up water as it pours in from a leaky roof, but will not fix the roof, or even admit there’s a problem.  If this isn’t stupidity, I don’t know what is.